Good day ladies and gentlemen and welcome to the fourth quarter 2009 Protective Life Corporation earnings conference call. My name is Katina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this presentation. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. John Johns. Chairman, President and Chief Executive Officer. Please proceed.

John Johns

Good morning everyone and welcome to the Protective Life Corporation fourth quarter conference call. I am here in Birmingham in our home office and with me is our senior management team. I'll make a brief comments about the quarter and the year then I'll turn the microphone over to Rich Bielen our CFO. Rich will take you through the segment earnings in more detail and I'll come back and make a few comments about our outlook for 2010 and then we'll go to questions-and-answers.

Again we think we finished the year on a strong and positive note. We reported operating of a $51 in the quarter, that compares to $0.80 last year. Net income was about the same $1.50 compared to a loss of $0.22 last year. As I am sure you know, we did enjoy the benefit of a substantial gain resulting from the repurchase of about $800 million of notes that we've used to securitize some redundant preserves. The impact of that in the quarter was about $0.89 per share,

I think one of the hard things we do now with all of the changes in accounting rules including kind a pull through the numbers and come up with a run rate, we think the run rate for the quarter was somewhere in the mid $0.50 range maybe up to about $0.60 somewhere in the $0.55, $0.60 range for the quarter when you work through all of the moving parts.

Want to a couple of other things I think that are worth noting, we did see a continued improvement in our reported work value per common share. We finished the year at $28.96. That compares to a low of $10.89 at year-end last year. I guess needless to say we did see substantial improvement in the mark-to-market in our securities portfolio as the year progressed.

Some other positive news is that we do expect when we close our statutory books to end the year with consolidated statutory capital at a record all-time high level. We think our statutory high capital and surplus will be in excess of $2.7 billion at the end of the year. We also expect that our risk based capital ratio will end the year again at a record high level. Again, we are not exactly sure where it will come out, but we think it will be north of 410% and even if you eliminate the benefit we received from actions taken at the NAIC during the year with respect to RMBS securities and the deferred tax asset, we still think we'd have been north of 375%. We will be north of 375% when we finally close the year stat books.

We also saw some additional positive trends in our investment portfolio impairments in our securities portfolio. We are only $18.3 million in the quarter, again continuing the trend we've seen of the reduction and impairments and we hope that and expect that that trend will continue on in to next year. Our commercial real estate portfolio continued to perform a pretty well in context of a tough market for commercial real estate. Our problem loans were only about 60 basis points of the portfolio and we actually saw just a slight improvement in problem loans when you compare the fourth quarter to the third quarter.

Turning to our segment earnings, we continue to make a lot of progress on meeting funds in our Life Marketing Franchise. Once again we enjoyed a very strong and positive mortality results and like marketing mortality was almost $15 million better than our pricing assumptions for the year. That continues a trend we've seen over the last couple of years. We ended the year with very strong sales momentum in our universal life product line and we continue to execute on our plan to shift our emphasis from term insurance to for profitable universal life products.

In the Annuity segment, it was a terrific year. We had record pre tax operating earnings in the quarter. We had strong earnings for the year. We had strong sales in the quarter. We had positive fund flows for the year in our Annuity account balances top $10 billion. Also we're very pleased by the progress we're making and expanding our distribution footprint in the Annuity area. We continue to expand and upgrade our team of wholesalers and we continue to gain access to larger and ever hotter quality distributor platforms as well.

Once again, the steady-eddie acquisitions line came though for us. We had solid and steady earnings and I guess you would surmise from the very strong report I just gave with respect to our statutory capital. We now believe we're back in a position to be actively looking at acquisitions and we plan to do so and really quite optimistic that in the current environment we will again see some attractive acquisition opportunities out there.

Our asset protection division had a very challenging year as you would expect in 2009 given all the turmoil in the auto industry but again, the division has done a good job we think of navigating through some difficult circumstances. They cut expenses, they've benefited to a degree from a [apply] to quality among distributors that continue to build out a distributor base there and we did report a profit within the range of our expectations in that line as well. So knowing that its never as good as you like for it to be, but it still there is a lot fear to be for us, I think to be pleased with and I'm now going to turn it over to Rich and let him kind a walk you through the segments.

Rich Bielen

Thank you, Johnny good morning. I would first point out that in addition to the information contained in our press release, and supplemental financial information, there is also a slide presentation available to accompany this call and to help you follow our discussion. The slide presentation is currently being webcast from a link available on our corporate website www.protective.com. You can advance the slides independently in order to follow on with our conversation. Also, this conference call discussion includes forward-looking statements which express expectations of future events and/or results. Actual events and results may differ materially from these expectations.

Please refer to our press release and the Risk and Uncertainties as well as risk factor sections of the company's most recent report on Form 10-K and subsequent reports on Form 10-Q for more information about factors that may affect future results. This discussion may also contain non-GAAP financial information. Please see our website for additional information and reconciliation to GAAP financial measures.

Good morning everybody. One other point to make is we discovered that there is a typo in our press release last night regarding net realized losses. We inadvertently recorded the pretax numbers $1.9 million when it should have been recorded as $1.2 million which is the after tax number and it doesn't change the EPS that is still $0.01 a share. So just would like to make that correction that was pointed out to us this morning.

Turning to slide three, just to point out, after tax operating income for the quarter was $132 million for the full year, the $323 million that is a record level of operating income. Our net income during the quarter was $131 million and for calendar year 2009 its $271 million. Our operating income this quarter on an EPS basis was $1.51 and really we had very little activity below the line, the net result was only a loss of $0.01 resulting in net income of $1.50 in the quarter.

For calendar year 2009 we had operating of $3.97 per share. The net income of $3.34. As you know that we did have in the fourth quarter a one time impact of a pre tax gain of $120 million which did help operating earnings by $0.89 a share.

Turning to slide four, to just go over the net realized investment and derivative activity, during the quarter we had $18 million of impairments. As we had expected, we thought our impairments would continue to moderate in the second half. During the first half of calendar year 2009, we had about $130 million of impairment and here in the second half of 2009 that's been reduced to about $50 million.

As you know, we have Modcos related to our Chase Insurance Group acquisition over a few years ago. That actually contributed about $4 million of positive investment gain during the quarter. We also have been hedging during calendar year 2009 for an upward move in interest rate. The mark-to-market on those contributed $11 million of realized gain on that mark. We also still have one remaining credit to full swap on the books. It's just $25 million and it relates to an investment grade index. That continued to perform positively in the quarter. And then all the other activity during the quarter really netted down to almost zero.

On a gross basis we had approximately $20 million of gross gains and gross losses in our normal trading activity. One of the questions this morning that we got was the breakdown on the impairments and I'll just give you a quick rundown about $3 million of it related to our all days, $2 million of it related to other mortgage backed securities and about $3 million of it related to sub prime bonds and the balance were miscellaneous corporate positions that we wound up having. We've got a lot of questions in the past about our old days. The remaining book value on those old AA old days as of the end of the quarter is only $6 million. So we've effectively written those off over the years.

Turning to slide five, shareowners equity ended the year at $28.96, up from $26.91 at the end of the third quarter and $10.89 at the end of last year. As you can see, our gross unrealized losses continue to improve. At the end of last year, in the middle of the financial crisis, the gross unrealized losses were approximately $3 billion. Those are now down to $1 billion and sequentially, they continue to come down from the third quarter when they were about $1.2 billion. The net unrealized loss now is down to $400 million and you can see the impact of tax in that and then some accumulated other gains and losses and so the total AOCI loss now is down to $321 million.

Turning to slide six, we continue to get a lot of questions around our residential mortgage backs. So, we just want to point out to everybody here is a breakdown of all the residential mortgage backs. If you were to compare this to the third quarter, the ratings migration in these portfolios have slowed down materially, but when you look at our below investment grade, this represents approximately half of all the below investment grade positions that we have seen and you can compare both the GAAP book value and amortize cost and current sale value on those.

I'll turn the slide seven, and just to remind everybody that almost 99% of these positions are either super senior or senior positions and the real purpose of slide seven is to continue to point out the short average life of these securities. If you look at our prime portfolio, the expected average life at this point is 2.3 years, even our (inaudible) portfolio it's approximately three years and our subprime is less than two years. We continue to see very rapid amortizations with our prime portfolio paying down in the fourth quarter in an annualize rate of 32% and you can see the footnote at the bottom. In the fourth quarter alone we have $280 million of pay downs and $1.3 billion for calendar year 2009, and a preliminary analysis of the pay downs in the month of January indicate there were the pace very consistent with the fourth quarter of roughly a $100 million.

Turing the slide 8, this is just a submission of where the commercial mortgage loan portfolio, we have resumed very, very limited mortgage production at this point. We ended the year with the portfolio of $3.9 billion that is up approximately 1% so we really have not been adding to the portfolio. We have a very granular portfolio, the loan size is $2.5 million. We also focus on trying to make sure the portfolio continues to amortize or weighted average amortization is just over 20 years where the coupon rate is 6.3% and then the average loan-to-value of 54%, that is the original loan to value on all of these loans adjusted for the amortization today. The weighted average debt coverage is $1.29 and our problem loans as of the end of the year only totaled $23 million which was only 6/10 of 1%. The portfolio continues to perform well. We had very little participating income during the quarter. It only totaled $200,000.

Now turning to the division starting on slide 9 with Life Marketing. We're reporting $31.6 million for the quarter. We did have favorable mortality in the quarter of $6.2 million and for calendar year $14.5 million. As you may recall, we've been estimating that our mortality in our plan as we measured it would be favorable about $3 million in the quarter. Holding down the investment earnings is, there is lower investment income due in this portfolio. The couple of reasons are, the heavy cash track is impacting the investment income being allocated here. Also when the rule changes came about in the second quarter of the year which allowed us to lower our deficiency reserves related to our term business. That lowered the reserves on which we allocate investment income in this quarter. So that pulled the estimate down.

The other thing holding down earnings is that we are experiencing higher funding cost than we originally projected. The cost of securitization as all of you know has gone up over the years and so when we originally set out our plan, we expected lower cost. Now we're seeing higher costs and that is holding down earnings at this point. So I think one of the key things to know is that our fourth quarter sales were at the highest level in UL since the first quarter of 2006 and then one other earnings item that came through that we referenced in the press release, if you recall in 1999, that was the last year before XXX came into place. We are now starting our product that was sold during the 1989 calendar year come out of its level term and go into its post level term and what we've seen is versus our original expectations earlier in the year, we are seeing higher lapse rates on those post level term profits than we originally expected and that caused us to reduce income in this line this quarter by $6.5 million and so there was a question regarding the increase in operating expense. That $6.5 million is running through the increased operating expense and so when we look at the division of $31.6 million, that adjustment to the post level term offset the favorable mortality and some seasonality we see in the business.

Turning to slide 10, we saw $44 million of total sales. I think the big thing to notice here is that our sales mix has shifted to approximately 50-50 of term in UL. That's been the strategy that we've been trying to implement all year during calendar year 2009 and we also see if you work that our sales this year in a very difficult market are up versus 2008. We've also seen that we've grown our UL market share in almost all of our IMO's during the year. So the momentum we've started in terms of the UL business has continued and really resulted in a very high level of sales in getting us to a 50-50 mix between term and UL.

Now moving to the annuity's business. We're reporting $19.6 million including fair value. Ex-fair value we're reporting $12.8 million we continue to see positive segment fund flows, the fair adjustment primarily related to GMWB was $5.7 million and then the account balance for the year is now exceeding $10 billion which is a new record. One clarification to Johnny's comments at the beginning in the call, earnings for new [lease] record for calendar year 2009 not for the fourth quarter of 2009.

If you turn to slide 12, you can see our annuity sales in the quarter were $522 million. We showed a record level sales in the VA business in the fourth quarter with a product that's been somewhat de-risked and also prices have gone up in this business. So we see the returns being attractive and as people know we don't have much exposure to that risk in terms of our portfolio. We planned for the year to sell $2 billion of annuities and we came in at just over that at about $2.20 billion.

Now moving to slide 13 on acquisition. We're reporting $32 million and as you can see it's just a very stable earnings pattern. We continue to work on expenses and lowering expenses we continue to have positive mortality in both chase and the legacy acquisition business, but that is obviously being offset by the run-off of the business, and we expect this business to run off at about 67% a year. To you give you a breakdown, chase continues to perform very well for us. When we look underneath chase actually was about $17 million of the $32 million and the legacy acquisition loss contributed about $15 million of earnings.

Moving to slide 14, and the stable value products division, we're recording $10.4 million of earnings this quarter with a more normalized operating spread of 116 basis points. The balance decline this year is very consistent with our expectations rending the year of $3.6 billion. We did not have any sales in 2009. One of the reasons for the drop in the operating spread is that given the fact that we've been allowing the balance to decline, we've actually been allocating cash and t-bills to this line effectively [defusing] the maturities that have been coming up and so as a result, as you know t-bills yield very little right now. That dropped the operating spread as we've really been using this defusing strategy. At this point we are going to continue to evaluate the market potential during the year. We'd expect the decline to continue but if we see opportunities as the year goes on, we may start to actually reenter that market.

Turning to slide 15, the asset protection division. This is a very difficult auto marine and power sports market. Divisions recording $6.6 million of earnings for the fourth quarter. The fourth quarter did get positively impacted, we settled an infringement on one of our products from a number of years ago. That contributed about a $1 million. We would like to point out that the service contracts which is the main product here improved by 7.5% over the fourth quarter of 2008. Sales in the quarter were $74 million versus $76 a year ago. They are down from $86 million in the third quarter but if you recall the third quarter benefited from the cash for clunkers program that increased auto sales.

Turning to corporate and other, when we gave you our plan for the year back in March, corporate and other have the expectation that based on the way we allocate our expenses that it would actually have a loss of about $14 million. During this quarter, we had the surplus note repurchase that contributed $120 million to earnings. We also have the trading portfolio, currently as a value of approximately $272 million. It had a positive mark in the fourth quarter of $6.3 million. Our investment income versus planned loan was down $10.4 million and one of the things that caused that shortfall was that we are beginning to see somewhat slower prepayments that we saw earlier in calendar year 2009 and when we ran those adjustments through our investment income, it reduced investment income by about $4.5 million. So it offset a good bulk of the benefit that we saw from the positive news on the trading portfolio.

The other items contributed a positive $2.4 million versus plan showing a recorded $104.4 million. One last thing that with respect to the surplus note repurchase, we continue to make progress on ultimately completing the restructuring of our Golden Gate structure. We are working on securitization. We are well down the road with respect to the investment banks we're working on. We would hope that we will complete that here in the first quarter. It will not contribute to capital at the time of closing, but it will do is it will allow us to have a peak reserves out in a few years fully funded and committed at this point in time.

And with that I'm going to turn it back to Johnny for some closing comments.

John Johns

Yes, thanks Rich. Let me just wrap up with a few thoughts about what we see ahead in 2010. First of all, we do expect to our capital levels remain very strong as we go out during the year. Our focus is going to be on several things though. One is, as Rich indicated, we do carry now substantial excess liquidity and it's been a material drag on our earnings. We are making some progress and investing that liquidity, but we are also doing it very cautiously. We want to make sure that we only buy assets that will perform for us. So that's going to be a key focus for us, just figuring out what to do with that excess liquidity and when we do get it invested you will see significant pickup in earnings and I'll comeback and talk about that in just a minute.

In addition, we're taking a very careful look at our life insurance products where we're making efforts to redesign products and make them more profitable and more capital efficient. In addition as Rich indicated as I have indicated we are shifting our emphasis more towards universal life products which have better profit emergence patterns and are more profitable for us. We are going to be back in the hunt for acquisitions. So we're excited about what we think would be some good opportunities out there for acquisitions as we look forward. And we continue to make great progress when we see many more opportunities to grow our cool retail franchise that life marketing, annuities and asset protection.

I do also want to say that one significant thing we did in the later half of the year is we substantially beefed up our risk management operations at the company. We bought in Ed Berko at an EVP level. He is here with me as our new Chief Risk Officer. Ed's also building out a very strong staff containing people to insure that we're world class in terms of risk management as we go forward.

As you know, it is not our practice now to give earnings estimates. We just thing its too difficult to do given all the changes in mark-to-market accounting, but would like to give you our thoughts on what we considered to be our core run rate underneath all the noise that you in the accounting. Given the fact that we are caring substantial excess liquidity at the present time, we think the low end of our run rate is about $0.55 a share. We see that climbing to about $0.70 per quarter per share, during the year as we get our excess liquidity invested and we sort of normalize things.

Typically the first quarter is the weakest quarter of the year. There is some seasonality in our earnings pattern. The fourth quarter is typically our strongest year. So we would expect to see a progression from kind of that mid $0.50 range up to high $0.60 to $0.70 range as the year progresses. And again that's not an earnings forecast and we do not intend to update that as the year goes along.

So to say, we have come through a tough time. I think the whole industry has indeed all the financial services have come through a very difficult year, but we certainly feel like our platform has stabilized and has gotten strong and we do see some really good opportunities out in the future to grow earn and so with that we'll turn it back to the operator and respond to your questions.

So I guess my takeaway from your results this quarter is that capital levels as you sort of indicated and especially with the risk based capital ratio where it's at, are substantially in excess of what you guys had expected and I think what street is expecting. Investment portfolio looks like it's in very good shape at least relative to expectation. So it's really about earnings and I'd like to sort of focus on the life marketing results in a little bit more detail. I guess Rich, I'm interested in your commentary on the securitization costs, how much those are dragging life marketing results versus sort of maybe a year or two ago when the cost of those solutions were significantly lower and then as we look out into the future, assuming you get the securitization that you said you're working on and maybe get across the finish line in the first quarter. You said that doesn't have necessarily an impact on capital but does that have a positive impact on the earnings?

Rich Bielen

John, we'll kind of deal with the first question for securitization cost. As we look back to the original securitization model in 2006 or so, 2007 and compare to today, what we're seeing is the overall cost is probably costing us about $5 million a quarter more than we had originally projected (inaudible) for a couple of years ago. So that is part of the drag that we're seeing and we've really spent a lot of time this past quarter trying to get underneath and see all the moving parts that relate to securitization.

With respect to the second part of the question, the transformation that we will do when we restructure Golden Gate with this next piece, the real strategic benefit is now that we'll have that financing in place out to the peaks. By itself it won't reduce the costs of what's currently going on, but it will allow us ultimately to restructure the current Golden Gate and replace some of those assets with some other fixed rate assets where we think overtime we can start and narrow that $5 million a quarter cost going forward. But it's going to be incremental approach. So we do think that it will be benefit out in the future but it will take time for us to reposition our portfolio.

John Johns

John just to add one more thought to that, if we don't securitize then we will have to fund those redundant reserves from our balance sheet and we're certainly capable of doing that and maintaining a healthy RBC ratios but we free up substantial amounts of capital out two or three years if we can reinvest, we hope and believe at a level of return much higher than the cost of the securitization, so ultimately I think securitization while expensive now, it will be a accretive later because the cost of it is well below what we think would be normalized returns on an acquisition or new product sales whatever.

Unidentified Analyst

Okay, that helpful Johnny and Rich. So then if I take your view that quarterly earnings by sort of the end of 2010 gets to around that $0.70 level, is that with the full deployment of your excess liquidity sort of contemplated in there?

Rich Bielen

It would assume substantial deployment of liquidity but it would not assume any deployment of excess capital.

Operator

Your next question comes from the line of Andrew Kligerman representing UBS, please proceed.

Andrew Kligerman - UBS

Hey good morning, can you give color on the acquisitions, Johnny you said that you're back in the hunt for acquisitions so maybe a little color what that hunt is looking like? Are there a lot of deer in the woods or is it going to be very difficult and then just in terms of understanding how its going to play out without additional acquisitions. You mentioned little earlier that the run off is about 6% to 7% a year and then that you are working on expenses. As the run-off comes down, how much can you cut into expenses and how and then I have a quick follow up.

John Johns

Yes, there's a lot going on out there around the world really that makes us excited about the opportunity to do acquisitions. We continue to think that there is a need for substantial restructuring of the US life industry. We think that there are a lot of players out there who are marginal in different product lines and probably need to consolidate back to more core businesses. It is a little early to see this playing out in full. We think that some of the changes in capital standards around the world may make pipe less attractive within the US for people that are subjected to different capital standards. Solvency too for example is still in the making, but if we think that could actually turn out to be something that causes some re-looking at US insurance portfolios.

In terms of our approach to it, we are certainly prepared to continue to do what we've done which is sort of hit you know singles and doubles, smaller size acquisitions we think we can continue to do that very effectively but we also learned a lot when we did the Chase acquisition about how to work with other parties so we're looking at some ideas to join forces with some other sources of capital and see if we could step it up and play a little bigger league in terms of the size of things that we could do but again we would be combining our excess capital with other people's capital. That's all kind of informative stage right now. So I don't want to get ahead of myself in comments but it's certainly something that's on the radar screen for us.

With respect to the run-off we don't see expenses as a major issue. We still have a building to be scalable with respect to that platform. It's always been one of the benefits of having a retail life insurance business that's growing as well as acquisitions business, that grows and then it runs off, it grows, it runs off. We have a lot of flexibility in terms of deployment of people and resources.

Andrew Kligerman - UBS

So then just kind of digging into little more, well you mentioned substantial excess liquidity. Maybe just a sense of what that number might be and then with regard to the acquisitions 410 RBC ratio, very nice. What does that translate into in terms of potential excess capital at the (inaudible) and as a [parent]?

John Johns

Enter the second question first, as compared to a 350 RBC ratio, around $300 million to $400 million, something in that range, that's not really clear exactly, what you should compare to, what the rating agencies move their standards around a little bit, some are high, some are low, but against a $350, $300 million to $400 million of excess capital. Rich will comment on liquidity.

Rich Bielen

Yes, and Andrew on liquidity I think as times normalize here, I think because of our long term business, we continue to see positive cash flows. When we get all the dollars deployed, we expect our cash balance to be closer to 1% of invested assets which would be more in a $300 million type of range.

John Johns

We're currently carrying $800 million to $1 billion or so of investable cash.

Andrew Kligerman - UBS

All right and then just quickly back on that excess $300 million to $400 million, that's at the operating company level. Is there anything at the [parent] in addition to that?

John Johns

There is not Andrew

Operator

The next question comes from the line of Ed (inaudible) representing Bank of America. Please proceed.

Unidentified Analyst

I had a few questions I guess on life marketing the $6.5 million expense related to higher lapses, is that adjustment related to more than just the 1999 book of business or is it something we should be thinking about as the potential expense going forward and then I have a few more.

Rich Bielen

I'll answer the first one Ed, that really all relates to 1999 business maybe a little bit back to 1998 but its all in advantage when you had that big ball that came through and now we're seeing what the results are and just the lapses are higher than we originally expected on that block.

Unidentified Analyst

And the comfort level that this would not be an issue for, can you do anything? If from an accounting standpoint could you book any expense related top other blocks at this point.

Rich Bielen

We don't see any need to; we really relate to that what we thought that block. This is the first material block coming out and so this relates a little bit to the reinsurance. We booked the income expecting the policies to stay and then what we're seeing is they have been coming off and lapsing faster then we would have thought. So this was a lot of it happened in the fourth quarter of '99 when those policies that we're seeing it here in the fourth quarter of 2009.

Unidentified Analyst

I guess the question was what changed about 2000 business or 2001 that this wouldn't be something to think about?

Rich Bielen

We've recognized where it is and the business going forward is smaller because you had a big almost fire sale in that 1999 period when the rules were changing.

Unidentified Analyst

Okay and then acquisitions, did you I am sorry if I missed it, but did you say what the favorable mortality was versus what you normally anticipate as favorable?

Rich Bielen

It was a million or so I believe in the block in acquisitions.

Unidentified Analyst

And what is that, typically in a quarter where do you get there.

Rich Bielen

About that. I mean that's pretty consistent. We continue to have that kind of favorable mortality.

Unidentified Analyst

Okay and then on the risk based capital. I understand your confidence in completing a securitization this quarter but just could you give us some sense of what the RBC impact would be if you did have to fund these excess reserves on balance sheet?

Rich Bielen

If we had to fund the excess reserves on our balance sheet for all of calendar year 2010, it would probably impact RBC somewhere between 15 to 20 points. So shave plenty of capacity to continue to fund. We're just trying to lock the doors down and take care of any needs we have in the future now.

Unidentified Analyst

What about whatever the big year is that you would have peak reserves what would the impact be?

Rich Bielen

Probably I'll call it between 30 and 40 RBC points and that would be in 2014.

Unidentified Analyst

And that's additional to the 15 to 20 or?

Rich Bielen

No, that includes the 15 to 20.

Unidentified Analyst

So 30 to 40 sort of peak in 2015.

Rich Bielen

That's 2014.

Unidentified Analyst

Sorry 2014 okay. And I am sorry just final quick question. I didn't quite understand what you said about corporate (inaudible) when you said that slower prepayments were having a negative impact on the net investment income. Could you just explain that?

Rich Bielen

Typically every quarter we go through what we refer to as a FAS 91 adjustment where we re-estimate all of the prepays on everyone of our mortgage backed securities and with the slowdown, we own the portfolio at a discount. With the slowdown we had to make an adjustment in the total $4.5 million a quarter.

Unidentified Analyst

So that's like a amortization of discount adjustment or something?

Rich Bielen

Correct, yes.

Unidentified Analyst

$4.5 million after tax or pre tax?

Rich Bielen

Exactly.

Unidentified Analyst

And the 5 million hit per quarter from the funding cost for reserves and life, was that pre tax $5 million?

Rich Bielen

That is pre tax.

Operator

The next question comes from the line of Steven Schwartz representing Raymond James & Associates.

Steven Schwartz - Raymond James & Associates

Just a few follow-ups if I may. Hopefully they'll be quick. We're talking here about a restructure, so I am clear, we're talking here about a restructuring of Golden Gate plus a new securitization, is that correct?

Rich Bielen

Yes, Golden Gate currently has all of the reserves and if we accomplish the securitization that we're effecting. We will split those reserves into two separate structures in order to turn around and (inaudible).

Steven Schwartz - Raymond James & Associates

And if I may follow up on the [lapsation] question, the hit that you took, I forget the number but the hit that you took in the quarter, is that recurring or was that kind of a one time catch up to get in line with what [lapsation] appears to be on that 99 block.

Rich Bielen

It's really more of a one time catch up as we've seen what the experience is then.

Steven Schwartz - Raymond James & Associates

Okay, great. And then if I may, just on the going back to the funding cost question, may be I misunderstood, I understand it's funded with by floating rate debt. What changed all of the sudden in the fourth quarter that hadn't been there in the third.

Rich Bielen

We have known that it dragged the earnings as a result of the funding cost on these items. Our funding costs, if you go back historically have been (inaudible) up approximately 50 basis points a quarter. This is the first time that we've actually quantified exactly for everybody what that increase in funding cost is impacting the life marketing. So it's been there and moving up and this is the first time we totaled this for everybody.

Steven Schwartz - Raymond James & Associates

Okay so its there so there is some element of catch up in there that maybe goes away going forward?

Rich Bielen

No I just expect that number unless we are able to reduce the cost which we hope to overtime, that is now an ongoing estimate of what the cost are versus what we originally planned when we first priced the product a few years ago.

Operator

The next question comes from the line of Mark Finkelstein representing Macquarie. Please proceed.

Mark Finkelstein - Macquarie

Couple of question. I have to do a few follow ups. I guess I am still a little bit confused about the securitization of reverse financing you're trying to do in the first quarter. Maybe I'll ask it this way, I guess that you got it done in the first quarter and you are kind of funding the peak reserve levels would you have higher expenses in the second quarter from higher financing costs or would that be fully replaced by I guess redeployment of assets which I think you said.

Rich Bielen

Mark it's a combination too we'll probably will as the reserves build, we're going to have increased costs and the structure that we're contemplating will have something of a ramp to it to try and limit that increased cost and then we will be able to restructure the asset somewhat within the current Golden Gate to try and reduce the cost on that piece. So there is a number of moving parts in there. We'll probably see somewhat increased costs when we look at it, but we think over time they'll be able to offset some of that with the redeployment on the asset side.

John Johns

And Mark we've also factored that into our thinking about what our run rate is.

Mark Finkelstein - Macquarie

Okay and then also just on the $6.5 million in life marketing. So was it all caught sin the fourth quarter and so we shouldn't see any impact on the first quarter.

Rich Bielen

That's correct.

Mark Finkelstein - Macquarie

Okay. Thinking about, I think you said the excess of $350 of $300 to $400 million, I guess how much of that would you be willing to deploy in thinking about a margin that you might want to keep.

John Johns

That's an interesting question. We would like to deploy it all, but needless to say we will not deploy capital in a way that will put our ratings at risk, so I think that'll be a discussion at the time, as to how the capital is deployed, what the risk of the capital sort of rating agency comfort levels and so on. If you look at the published work that's out there on the rating agency, it looks like $350 is a pretty good comfortable level for our current ratings categories.

Mark Finkelstein - Macquarie

Okay and then I guess thinking about annuities a little bit, came in kind of right what you guys expected to in the $2 billion range. I think you kind of managed the production of that during 2009. Do you have a budget for what you expect to deploy in 2010 in terms of annuity sales?

John Johns

I'll turn it over to Carolyn Johnson.

Carolyn Johnson

We don't expect a significant increase in the annuity sales in 2010. So it will be a similar level.

Mark Finkelstein - Macquarie

Okay and then just finally, Rich you mentioned maybe getting back into the stable value kind of production area. Does the split rating of your, have you had any impact on your ability to be in that market?

Rich Bielen

I think Mark, well we may see isolated opportunities. I don't think that given the current environment we'll ever see that regardless of the rating, with what we saw a number of years ago, but we do think as the year goes on there may be some opportunities to maybe roll some contracts or have some balances there. So we'll manage that and see what the environment looks like as 2010 moves on.

Operator

The next question comes from the line of Eric Berg representing Barclays Capital. Please proceed.

Eric Berg - Barclays Capital

First of all returning to Ed's question about the term policies, Rich, well I understand that there was a fire sale. I heard and appreciate your answer about a fire sale in 1999. I would have thought that since the 2000 policies were written just several months later, within the next succeeding 12 months and you had no experience on which to, I would think that the assumptions in the 2000 and 2001 book would be very similar to the 1999? Why would they be different?

Rich Bielen

Eric, I do think, one thing when you go back to that vintage there were very little sales in the first half of 2000 during that period of time, but I described on the call if you recall, we were using 90% reinsurance at that point and so what we saw earlier this year is we saw big credits to us these policy thus they were getting to their post level period, we were earning that as we normally would and then what we're seeing is the lapses are much higher than we expected. We now see that in terms of going forward so we already factored anything in going forward with respect to earnings projections already seeing what the behavior has been.

John Johns

I hope this doesn't confuse him, but from non-account perspective, remember then in this level premium products the premium kicks up dramatically after the guarantee period, the product the go away gets a lot more expensive. You don't know how many people will stay around at a much higher premium. Same time reinsurance allowances kick up dramatically with the higher premium and also you don't know until 60 days after the fact whether or not some one is actually going to keep the policy, they have a great spirit to pay the premium. So its made the accounting very difficult because we are on accrual system so, we are assuming some level of profit on policy that are on the books today that might lapse 60 days from now. So we just had to catch up, once we saw this phenomenon playing out, we realized that we were sort of forward accruing, basically reinsurance allowance as it probably weren't going to be there. So we changed our accounting, we kept with (inaudible) up, ready to move forward without this being noise in our earnings.

Eric Berg - Barclays Capital

That's actually very helpful an addition. Johnny two more question. First of all, with respect to the investment income, why would your your RMBS book be enjoying a rapid pace of repayment? As you mentioned in one of the slides that you have quantified in one of your slides like just a very short life, but you are suffering from a slowdown in prepayments in your corporate and other area related to the mortgage book?

Rich Bielen

Eric, at the beginning of the year, I think we expected the average life of the portfolio to literally be assured as two years. If you take the weighted average from the slide, you would find it's now at about 2.4 years and any of those adjustments of amortization, premium we don't allocate it to the individual business lines. When we make the catch up we just allocate it all to corporate and other and put it in one place.

Eric Berg - Barclays Capital

Thinking about earnings from your annuity business, excluding the fair value adjustments and the unlockings with respect to DAC and GMDB and so forth, it doesn't seem like the earnings growth is moving in lockstep or close to lockstep with the asset growth. For example, I believe you were managing more assets in your administering/managing more assets in your annuity business at the end of the December quarter, than you were at the end of the September quarter on a linked-quarter basis. Yet it looks like from your slide that earnings were very modestly down. How should we think about what drives the earnings in this business? I would have thought that things would be sort of moving closely in line with the asset growth?

Rich Bielen

Eric, one of the things holding down earnings there in the fourth quarter, the estimate was about $1.6 million. We had written some (inaudible) a number of years ago where the mortality is not within our plan. We had some debts in the third quarter. We had very little debts in the fourth quarter and so that held back annuity earnings by about $1.6 million in terms of that variance. So I didn't go to that level of detail, but that's one of the reasons you're not tracking. But we think overall the annuity business is actually tracking well and continuing to see improved earnings, but it's being masked by this negative mortality.

John Johns

Just to add a little bit to that and that steel block, some of that block is very lumpy. We have some big contracts. So if one person dies, then we get an infusion of earnings in a quarter and then we go two quarters and no one dies. So it does create a little bit of irregularity in the pattern.

Operator

Your next question comes from the line of John Fox representing Fenimore Asset Management.

John Fox - Fenimore Asset Management

Did you give the RBC ratio at the beginning of the call?

John Johns

Yes, John we think it would be north of 410% to 420% range.

John Fox - Fenimore Asset Management

If I think about Life Marketing run rate going forward, take what you reported, should I add back the $6.5 million lapse adjustment and then half of the better mortality, because you said normally you kind of think about $3 million a quarter and this quarter was $6 million.

Rich Bielen

That's probably about right. I think you're going to wind up with a number in the low 30s on kind of a run rate at this point in Life Marketing. It's actually about 35.

John Fox - Fenimore Asset Management

Is that our good run rate or you are saying lower, Rich

Rich Bielen

I probably for the moment given how we still need to restructure the Golden Gate, I put a range on it between 30 and 35 as we windup working our way through that restructuring of Golden Gate.

John Fox - Fenimore Asset Management

The Corporate Expense line, which was about $54 million or $55 million in the Corporate segment, was there anything unusual there, any other expense line?

John Johns

We had a little bit of elevation in interest cost in the quarter because of this restructure on the buyback of notes and basically reissuing of senior notes, to replace that we had a little bit of elevated expense in the fourth quarter that ran through the line.

John Fox - Fenimore Asset Management

Can you quantify a little bit?

John Johns

It was about $6 million.

John Fox - Fenimore Asset Management

In terms of liquidity Rich, is there some sense, can tell us how much you guys invested in the fourth quarter or a run rate that you see getting invested in terms of what the opportunities are to invest money?

Carl Thigpen

We had a fairly active quarter, in the fourth quarter, we had a lot of cash come in the door. The cash coming in the door has slowed down in the first quarter, corporate new issuances have been good and we probably have made progress to the tune of around of $600 million quarter-to-date.

John Fox - Fenimore Asset Management

Okay and what kind of new money rates are you getting at this point, Carl?

Carl Thigpen

Well it was it's primarily investment grade corporate and it's around 5%

Operator

Your next question comes from the line of Darin Arita representing Deutsche Bank.

Darin Arita - Deutsche Bank

I wanted to turn to the run rate EPS that you are giving and I was wondering how we got from the $0.55 up to $0.70. Is that just from redeploying the excess liquidity, and also the Golden Gate asset restructuring or are there other items to consider?

Rich Bielen

Darin those are the two major items that get us up to that $0.70. Johnny mentioned earlier we do have some seasonality, so we expect early in the year is lower and then later in the year it will move up as we get all this redone.

Darin Arita - Deutsche Bank

Just going back to the questions on the lapses and that 1999 business. Maybe I just didn't quite understand the answers that you had given. It sounded, you mentioned that that address in 1999, some of the 1998 business and the answer to Eric it sounded like you made some adjustments to take this into account prospectively. I'm not clear whether or not the 2000 and 2001 businesses will see this lapse issue?

Rich Bielen

Darin we should not and really related to timing of these reinsurance allowances, we've recognized the income and then because they were elevated, then we are seeing higher lapses, then we've basically gone ahead and now written it off and caught up and we are monitoring the business going forward very carefully so that we don't pick up income prior to knowing that it's going to stay on the bar.

John Johns

We've changed the way we accrued for these policies when they come up to the end of the level premium period. So we shouldn't have a true-up next year as we have this year. So we [book] it very carefully quarter-to-quarter and we don't think the problem will exist.

Darin Arita - Deutsche Bank

Just to be clear of that, that change in the accounting happened back in 2000?

John Johns

When you come up to end of the level premium periods, the premiums kicks way up, the reinsurance allowances kicks way up. If you have just a small number of people stick around at our premium you have to make a good bit of money on that, but it's hard to predict how many are going to stay around. We had an assumption and it would be will used for accruing our earnings, but that assumption turned out to be a little bit too positive for us. So once we saw that over a couple of quarters emerging, we changed and now we're not accruing that kind of income in the future. So we're just catching up for short time here in 2009 where we were watching those assumptions.

Rich Bielen

We're coming up on the end of the hour. Why don't we take one more question and then we're happy to fill in any gaps offline.

Operator

Your final question comes from the line of Mark Finkelstein representing Macquarie.

Mark Finkelstein - Macquarie

Thinking about your prime RMBS book, run-off of 2.4 years, a little bit higher, but still pretty quick. Even after the NAIC relief, how much capital is still trapped in that block and how much we can free up over the next two and a half years from ratings migration.

Rich Bielen

Mark, we don't have that number available right now. We will be able to give you that after we file our stat statements and complete that and have that all run through, but we don't have that as we are sitting here.

John Johns

But it should be a quite substantial number

Mark Finkelstein - Macquarie

Okay it's a reasonably substantial number you think

John Johns

It should be yes. Yes, thanks everyone. We appreciate your participation in our call, have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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